24 March 2009

The myth of the corporate institutional investor

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I am supposed to be having a break from blogging but there have been some comments in the mainstream media recently that have motivated me to respond. Why is it that many journalists have not yet understood that there is no such thing as a corporate institutional investor?

All companies are only entities in as much as they are owned by shareholders. By following the ownership trail, it usually leads back to people like you and me, however rich or poor we may be.

By following the trail, it can be found that the only true investors are either natural persons or legally incorporated not-for-profit bodies.

Natural persons- the naturals

Natural persons are people like you and me. We might invest for short-term personal gain or to support the development of something of more lasting benefit. Only natural persons can read blogs and books and make the effort to think.

Not-for-profit entities- the nfps

Not-for-profit incorporated bodies have either been formed from the contributions of donors, who theoretically have no intention of personal financial gain by their actions, or they have been formed by governments from taxation revenues. The donors and taxpayers aim to invest, again theoretically, in the well-being of the environment and/or society.

The managers of donations invest their time, perhaps for a salary, to make the most of available funds. The managers of taxation, supervised by the people we elect in a democracy, are usually also provided with a salary to make the most of our funds (for our benefit - theoretically).

For-profit entities

For-profit entities, on the other hand, are formed essentially from the investment funds of natural persons and not-for-profit bodies. Their main purpose is to make a return on the funds provided by investors.

The so-called "institutional investor" is usually no more than an agent for the true investors, ie. the naturals and the nfps. Such organisations as for-profit superannuation funds and for-profit insurance companies, the main "institutional investors", are not really owners of anything themselves. Why, then, are they given the power to vote as shareholders at annual general meetings? Who should really have the right to vote?